Trump tariff threat escalates UK-US trade tensions over digital tax

Donald Trump’s threat of a ‘big tariff’ on UK exports exemplifies a classic protectionist response to perceived fiscal discrimination, as the UK’s 2% digital services tax targets revenues of large US tech firms. The dispute highlights the risk of a retaliatory trade war, where tariffs act as a barrier to trade, reducing exports and potentially worsening allocative efficiency. With the UK defending the tax as a temporary measure pending global reform, the standoff reflects deeper tensions over tax sovereignty and globalisation, raising the prospect of welfare losses and reduced gains from trade on both sides.

Trump threatens 'big tariff' if UK does not drop digital services tax on US tech firms | UK News | Sky News

1. Explain the terms ‘tariff’ and ‘digital services tax’.

2. Discuss the benefits and costs to consumers and producers of the digital services tax.

3. Evaluate the likely effects of the US’s threatened retaliatory tariffs on UK economic growth.